Dear Subscriber,
Happy New Year!
In this letter I plan to review the performance of my Magic Formula portfolio during 2024 and evaluate how it fared including any learnings looking ahead to 2025.
Long term readers of the newsletter will know that my strategy has evolved a great deal since launching the publication in November 2021.
I started the portfolio with the intention of following the Magic Formula strategy as described by Joel Greenblatt in The Little Book That Still Beats The Market. As time went on, I realised the approach was not suited to my temperament. While the strategy is supposed to be semi-passive and systematic, the last three years have taught me that I am an investor that is lured by the intellectual pursuit of analysing individual companies.
Having a portfolio full of largely undesirable securities during the first couple of years of running this experiment was not easy for me, hence the gradual progression away from a diversified basket of 20-30 Magic Formula stocks, to a concentrated portfolio of five core holdings today.
So, while I am not strictly following Greenblatt’s strategy anymore, I still use his screener as a starting point to identify new ideas and as such, continue to use the term ‘Magic Formula’ to describe the portfolio and related activities.
I recall Greenblatt mentioning in the book that one of the reasons why investors who follow the Magic Formula are unable to reap the same returns he outlines in his book is because they are not disciplined enough to follow the strategy to the T. Human emotions and biases get in the way, causing the investor to buy or sell at inopportune times. Based on this alone, you could say that I failed my initial objective of following the original Magic Formula to perfection.
But have I failed my main objective to outperform the indices over 5 years by betting on Magic Formula stocks? This is yet to be seen.
If this experiment has taught me one thing about myself as an investor, it is that I am much more in favour of constructing a concentrated portfolio of my best ideas as opposed to a diversified basket of securities. One reason for this is that I enjoy the process of studying companies and it is much easier to stay on top of three to five companies rather than twenty to thirty. Also, there is plenty of research out there suggesting that the more positions one has, the closer one gets to becoming the average, i.e. the less chance there is to outperform.
I wrote a tweet on 9th November 2024 highlighting my decision to focus on “big bets”. In it, I mentioned that I learnt the hard way that low allocation + high performance = low positive impact. I also said that now at five holdings, my objective is twofold: high performance and high impact.
While three months of performance data is not a lot to go by, it seems that the decision is paying off. I ran a report on Sharesight to pull the performance data of my portfolio from its date of inception to 9th November 2024.
Here are the results:
Performance 26/11/2021 - 09/11/2024
At that point in time, SPY was outperforming by 9.57% in total! During late October/early November, I then made the decision to concentrate and bet big on my best ideas. The results since then are extraordinary. When compared to the performance of the portfolio since inception to now, you can see that currently SPY leads by 1.58%.
Performance 26/11/2021 - 04/01/2025
In other words, since I took the decision to concentrate, SPY has increased by 0.06% while the Magic Formula portfolio has risen by 8.05%, taking its 3Y CAGR to almost 10% vs. 11.47% for SPY. The portfolio is now outperforming Vanguard’s global index (VWCE), whose performance stands at 8.61% and is within a hair of SPY. Remarkable.
The below chart highlights where most of the outperformance has come from between the moment the decision was made to liquidate the portfolio and consolidate the portfolio into five core holdings.
Performance 09/11/2025 - 04/01/2025
In my previous letter, I mentioned my investment in Ituran Location and Control (ITRN) but failed to mention that I was simultaneously heavily purchasing shares of Crocs. Both companies were (and continue) to trade at compelling valuations in my opinion. The above chart reflects that the bulk of outperformance has come from Williams Sonoma, up a whopping 50% during the timeframe. Buckle, the position I have owned for longest, also contributed 18% while Ituran and Crocs contributed 14% and 23% respectively. The only position that underperformed during the timeframe shown was Warrior Met Coal (HCC) which was down around 24%.
I said it before and I will say it again. There is not much data to go by so I do not want to jump to any conclusions yet. It is, however, extremely encouraging to see such positive recent results given such a short timeframe and I am confident with the portfolio construction looking ahead to 2025.
Looking ahead to the upcoming year, I have a few objectives I would like to share:
Do not sell any positions that I have not held for at least 3 years
Do not initiate any new positions this year
Add to existing holdings only if upside is sufficiently compelling
I believe that by sticking to the above objectives, there is a high chance that the portfolio will be well on its way to catching up with SPY and achieving its initial objective of outperforming by November 2026.
With that, I wish you all a great 2025 and look forward to sharing my Q1 letter in April.
QC
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